2008 ASA Report Shows Progress

Policymakers' understanding of sophisticated risk transfer issues is growing, and that's good news for construction subcontractors, according to The ASA Report: The Policy Environment in the States. ASA's annual evaluation of public policies in the 50 states and the District of Columbia revealed that legislators and courts took new steps in 2008 to limit how contracts or insurance for construct...

Material and Information Courtesy of the American Subcontractors Association. Edited by Christina Fisher.

April 20, 2009

Policymakers' understanding of sophisticated risk transfer issues is growing, and that's good news for construction subcontractors, according to The ASA Report: The Policy Environment in the States. ASA's annual evaluation of public policies in the 50 states and the District of Columbia revealed that legislators and courts took new steps in 2008 to limit how contracts or insurance for construction/design services may allocate liabilities. This is a key public policy issue for subcontractors, who are often forced to pay for the costs of jobsite injuries or damage caused by others, even though the subcontractors are faultless.

Legislative/judicial activities in 2008 caused the scores of eight states to change from last year's ASA Report, including New York and Maryland. New York's score changed in part due to new restrictions on risk transfer. ASA members educated policymakers about risk transfer, and other business practices, through ASA's chartered local chapters and state organizations.

ASA's report scores and grades each state in seven policy areas and uses the results to calculate an overall score, grade and rank for each state. New Mexico remains the only state to receive an overall passing grade in The ASA Report. New York and South Carolina are within five points of a passing score of over 60 percent.

Anti-Indemnity And Additional Insured: The report examined the contractual anti-indemnity laws of each state for their restrictions on risk transfer when a loss is the sole or partial fault of the indemnitee. It also reviewed which states close the "additional insured" loophole. Both public and private work was reviewed.

The results reflected slow but steady progress on the complex issue of indemnity since ASA kicked off its "Subcontractors Transfer of Risk Action Plan" (STRAP) program in 2001. In the first ASA Report released in 2004, two states — Montana and New Mexico — had perfect scores in the anti-indemnity category, and 48 states and the District of Columbia had scores of 41 percent or less. In the 2008 report, seven states scored better than 41 percent in this category.

A court victory led to an anti-indemnity score change in New York from 41 to 71 percent. In Worth Construction Company, Inc. v. Admiral Insurance Company, the New York Court of Appeals declared the passing of liability to other parties through "additional insured" clauses to be against public policy except when injury arises from their actions.

Retainage: The report compared levels of retainage, retainage release dates, interest on retainage, and availability of the option to use securities in lieu of retainage and to use escrow accounts. Both public and private work were reviewed.

Several states continued the major trend of retainage reform that The ASA Report uncovered in 2007. Three states, including Maryland, enacted laws that resulted in score changes.

After years of hard work by ASA of Baltimore and the D.C. Metropolitan Subcontractors Association, Maryland adopted limitations on retainage in private construction. Gov. Martin O'Malley (D) signed S.B. 313 in May, and it took effect on Oct. 1, 2008. The law prohibits construction owners from retaining more that 5 percent of undisputed payments to contractors, and prohibits contractors from retaining more from subcontractors than owners retain from them. The retainage cap applies only to contracts valued at more than $250,000 and only if contractors provide 100 percent performance and payment security. Because of this law, Maryland's retainage score increased from 28 percent in 2007 to 43 percent in 2008.

Mechanic's Liens: The review of mechanic's lien laws provided insight into the complexity and variety of state laws. How many tiers of construction are covered? How much notice is required before a party can file a lien? How long does a subcontractor have to file a suit? Are contractual lien waivers prohibited?

The scores for New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia, Washington, D.C., and the Carolinas were not affected in this category.

Pay-if-Paid Prohibitions: These contract clauses threaten payments to subcontractors by stating that subcontractors will be paid only if the upper-tier contractors with which they have privity of contract are paid. The ASA Report reviewed state laws to determine which states ban, and which allow, the use of these clauses in private construction. The scores for New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia, Washington, D.C., and the Carolinas were not affected in this category.

Payment Bonds: Bonds are an integral payment assurance for much public construction, but each state has different laws, making claiming and perfecting a bond claim a quagmire of notice requirements and coverage differences. The report reviewed each state's laws, including bond size requirements, the construction tiers covered by the bond, and the scheduling requirements for filing claims and suits. Only public work was reviewed.

South Carolina legislators enacted S.282, which included clarifications to the state's statutes governing payment bonds. This change did not result in a score change.

Anti-"Bid Shopping": If a state allows a general contractor or construction manager to "shop a subcontractor's bid" to another subcontractor in order to obtain a lower final bid price, then it allows the unethical disclosure to others of a subcontractor's proprietary information. The ASA Report examined state statutes, highlighting states that have outlawed this egregious practice; only public construction was reviewed. Two states modified laws that curb bid shopping, but the changes did not affect their scores.

In New York, Gov. David Paterson (D) signed an enacted budget including reform of Wicks Law (S.6807-C/A. 9807-C), which requires public construction projects over a certain dollar amount to execute separate contracts for plumbing, electrical and HVAC construction. The law established separate, increased dollar thresholds for projects in different parts of the state. It also included a requirement that exempt contractors must, with their bids on public projects, list the names of their plumbing, electrical and HVAC subcontractors along with the amount of their bids. The law exempted public projects that employ project labor agreements from the bidding requirements of Wicks Law.

In South Carolina, the enactment of S.282 reorganized the state's bid listing law, making it easer to understand.

Prompt Payment: The report reviewed each state's payment laws, including the payment schedules from owner to prime contactor and prime contractor to subcontractor, and in the case of late payment, the right to suspend work, along with recovery of attorney fees and interest, and de- and re-mobilizations rights. It also reviewed the statutes for a "poison pill clause," which could eliminate any and all prompt payment rights, rendering the statute meaningless. Both public and private work were reviewed. No states passed prompt payment reform legislation in 2008.

"The 2008 ASA Report shows that progress on a complex issue like indemnity is possible, especially with the enduring dedication that ASA members have shown," says 2008–2009 ASA President Bill Olmo, Fedco Construction Inc., Santa Rosa, CA. "ASA urges subcontractors to use the results of The ASA Report to help legislators understand why reforms are needed and possible in their states."